You'll Never Guess What's Been Choking Obamacare Enrollment

The Affordable Care Act has been something of a rollercoaster ride of emotions for the general public since it became the health law of the land on Jan. 1, 2014.

In one corner, the ACA, which you'll likely know better by its nickname, "Obamacare," has been a nightmare for millions of consumers. The newly beefed-up minimum benefit requirements for Obamacare-compliant plans meant that millions of Americans lost their longtime health plans and were potentially forced to find a new primary care physician. It didn't help, either, that technical glitches with the backbone of the federal exchange, HealthCare.gov, plagued the 2014 enrollment campaign.

But the biggest criticism might be saved for the rise in premium inflation expected in 2017. An analysis of 14 major citiesfrom the Kaiser Family Foundation found an estimated average increase of 11% for the cheapest silver plan.

Yet there are a plethora of positives to come from Obamacare, too. Through the end of March, according to the latest report from the Centers for Medicare and Medicaid Services, Obamacare had enrolled 11.1 million people. By midyear 2014, Obamacare enrollment was only 7.3 million, so we've seen marked improvement over the past two years. Mind you, this figure doesn't even speak of the nearly equal number of enrollees who have gained coverage through Medicaid expansion in 31 states.

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From just the fourth quarter of 2013 -- prior to the implementation of Obamacare -- to the first quarter of 2016, Gallup's data shows that the uninsured rate has dropped more than six percentage points to 11% from 17.1%.

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You'll never guess what's been choking Obamacare enrollment

However, it's possible that Obamacare enrollment could have been even higher. A newly released study that was published in Health Affairs this week highlighted an unlikely reason why Obamacare enrollment is failing to be all it can be.

According to the three-author report from the Department of Health Policy and Management at the Yale School of Public Health, tobacco surcharges tied to Obamacare premiums could be adversely impacting enrollment.

There are only five factors that can affect a person's premium through Obamacare: age, geographic location, whether or not your spouse or family are included in your plan, which category of plan you choose (bronze, silver, gold, or platinum), and whether or not you use tobacco. Tobacco use carries a premium surcharge of up to 50%, and the vast majority of states do allow insurers to impose at least some form of tobacco surcharge on health plans for smokers.

Using data from the Behavioral Risk Factor Surveillance System between 2011 and 2014 (2014 was the first year of Obamacare's implementation), the study authors discovered that smokers with mid-ranging surcharges were 4.3 percentage points less likely to be coveredthan non-smokers, while smokers with high tobacco surcharges (defined as 30% or higher) were 11.6 percentage points less likely to enroll. Basically, higher surcharges mean less likelihood of enrollment, especially for typically healthier young adults.

Based on the authors' data across the 43 states that allowed tobacco surcharges in 2014, the median surcharge was $70 per month, or $840 more per year than non-smokers.

As icing on the cake, not only were smokers paying more, but the tobacco surcharges were essentially having no effect on smoking cessation. Put another way, it was assumed that these surcharges would deter people from smoking, but they've done no such thing. If anything, the surcharges have chased potential customers away from the marketplace exchanges.

Additionally, the authors opined that "putting a price on bad behaviors can alleviate the guilt of engaging in them, which has the unexpected effect: The behaviors increase."

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This is Obamacare's real problem

There are a veritable bounty of issues for Obamacare, including the possibility of hefty premium price hikes and a general dislike for the program from the American public. Now it appears we can add tobacco surcharges as well.

However, I'm not as convinced that losing smoking consumers is detrimental to insurers when all is said and done, even if they are younger adults that tend to be healthier.

Based on data from the Centers for Disease Control and Prevention, tobacco has a combined direct and indirect economic cost of $300 billion annually. This includes $170 billion in direct medical costs tied to illnesses caused by tobacco use, as well as more than $156 billion in lost productivity caused by premature death and exposure to secondhand smoke. Thus it's plausible that insurers could face higher than expected medical expenses, even with a tobacco surcharge tacked on to smokers' premiums.

In my opinion, the bigger issue with Obamacare enrollment is that the penalty associated with not buying insurance and the cost of buying the cheapest plan possible in your state are worlds apart. The individual mandate requires Americans to have insurance. If they don't, they'll be responsible for paying the Shared Responsibility Payment, or SRP. In 2014, this penalty was the greater of $95 or 1% of modified adjusted gross income (MAGI). In 2016, the SRP is now the greater of $695 or 2.5% of MAGI.

The Kaiser Family Foundation estimated that 2016 penalties could average $969. That's up substantially from the average $150 SRPthat consumers paid out in 2014. However, the estimated penalty from KFF is still far less than what the cheapest healthcare plan likely costs in your state. Even if you can find a plan for around $200 a month ($2,400 a year), we're still looking at a $1,400 gap between the SRP and buying a health plan. Younger, healthier adults who feel invincible are going to target the cheaper route, which is to pay the penalty. Even with the tax deduction that Americans may be eligible for by purchasing health insurance, the penalty proves cheaper in more instances than not. This is what really needs to be fixed if Obamacare is to be more attractive to younger adults.

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A tough call for insurers

The constant complications of Obamacare have made life particularly interesting, if not complicated, for investors in health insurers.

Perhaps no insurer's struggles have been more on display than those ofUnitedHealth Group , the nation's largest health insurer. Despite being represented in 34 state exchanges in 2016, UnitedHealth expects to lose around $500 million from its marketplace plans. This comes on the heels of more than $400 million in Obamacare losses in 2015. UnitedHealth made the tough decision earlier this year to pull out of all but a few states by 2017. The insurance company has described higher medical utilization rates and the ease of switching plans every 12 months as detrimental to its -- and Obamacare's -- success. But I'd again chime in that the SRP penalty and lack of younger adult enrollmentcould be to blame.

If I were an investor looking to take advantage of the Obamacare bump, I'd angle my investments around government-sponsored enrollees. Millions of individuals and families qualified for free medical care under the Medicaid expansion in 31 states that covers individuals making up to 138% of the federal poverty level. Medicaid patient margins may not be as robust as private insurer enrollees, but the sheer volume of Medicaid enrollees, as well as the guarantee of payment from the federal government, makes them highly sought after.

Government-sponsored health plan specialist Centene is one of the few insurers that has absolutely excelled under Obamacare. Revenue in the first quarter increased 36% from the prior-year quarter; its health benefits ratio (a measure of margin) improved by 1.1%; and it more than doubled its year-over-year membership.

We may have a better bead on where Obamacare is headed next following the November elections, but in the meantime I'd expect the wrangling around Obamacare to continue.